European Management Journal Vol. 24, Nos. 2–3, pp. 174–188, 2006 2006 Elsevier Ltd. All rights reserved. 0263-2373 $32.00 doi:10.1016/j.emj.2006.03.007 Fusion of Disruptive Technologies: Lessons from the Skype Case
BHARAT RAO, Polytechnic University, New York BOJAN ANGELOV, Polytechnic University, New York ODED NOV, Polytechnic University, New York
In this paper, we study the effects of integration of Skype, a European-based startup, had launched a one or more disruptive innovations and ask if the host of services by fusing VoIP (voice over internet resultant (new) innovation can have a dramatic protocol) and P2P (peer-to-peer) computing. It impact on new and existing markets, and the resul- sought to offer a challenging alternative to existing tant technology paradigm. We describe the evolu- voice communication solutions. While each of these tion and dynamics of this process using Skype as technologies (VoIP and P2P) was inherently new a case in point. Skype successfully fused peer- and potentially disruptive, a unique combination of to-peer computing (P2P) techniques and voice- the two as offered by Skype promised to radically over-Internet-protocol (VoIP) to create a new change the telecommunications landscape. Using standard and operating model. We discuss whether the disruptive innovation literature as a theoretical such integration of disruptive technologies may background, we develop a framework that examines lead to a ‘‘marriage of equals’’ or whether it leads the potential impact of a merger of multiple disrup- to dominance by a single technology – and if so, tive technologies. in what circumstances. 2006 Elsevier Ltd. All rights reserved.
Keywords: Disruptive innovation, Fusion, Integ- Background ration, Skype, VoIP, P2P, Standards, Peer-to-peer, Telephony, Communications Over the past decade, the telecommunications indus- try has witnessed rapid changes in the way people and organizations communicate. Many of these changes sprang from the explosive growth of the Internet and from IP (Internet Protocol) based appli- Introduction cations. The Internet became a truly ubiquitous means of communication, and this is reflected in Previous research in technology management has ad- the amount of data exchanged and commerce trans- dressed the issue of disruptive innovation as it re- acted over this medium. Today, the total amount of lates to a single technology. One novel question packet-based network traffic surpasses traditional which can now be considered is the potential impact voice network traffic. Interestingly, even on the pack- of a merger or integration of two or more disruptive et based network, the amount of bandwidth taken up technologies and their resultant pattern of innova- by Internet surfing is much lower than that taken up tion. In this paper, we use the case of Skype to exam- by various file sharing services like BitTorrent (which ine what happens when two or more disruptive uses P2P technology, a feature described later in this technologies combine to offer a potentially new value paper). In the wake of these technology advance- proposition. ments, it became clear to entrepreneurs that voice
174 European Management Journal Vol. 24, Nos. 2–3, pp. 174–188, April–June 2006 FUSION OF DISRUPTIVE TECHNOLOGIES traffic and services would be one of the next major The Rise of VoIP and P2P: Two Distinct applications to take full advantage of IP. This expec- Disruptive Technologies tation was based on the impact of a new set of tech- nologies generally referred to as Voice over IP (VoIP) and IP telephony. VoIP had the potential of creat- The Rise of VoIP ing many unique capabilities for carriers and cus- VoIP was developed as an IP based application in tomers who depended on IP or other packet-based order to provide convenient communication between networks. In parallel, innovations in the area of users using a variety of device types. VoIP essentially peer-to-peer computing meant that data could be referred to the delivery of voice communications over efficiently distributed over a vast network with little an IP network, specifically the traffic management or no centralized control. mechanism but not necessarily the layered applica- tions or services. IP telephony is described as the basic voice communication services delivered using IP net- Disruptive Innovations work, and enabling asynchronous and real-time voice communications. In the user environment, examples of IP telephony included dial tone, voice messaging, The role of disruptive innovations in creating new call management, caller ID and other functions con- market value has been an important area of study in sidered common or traditional telephony features. technology management (Christensen, 1997; Hamel, Examples in the carrier domain included feature 2000, Tushman & Anderson, 1986). These disruptive management and billing/performance measurement. technologies and innovations often create new mar- The underlying technology also enabled another cat- ket value in unexpected ways, both independently egory of integrated voice applications (advanced and through combination with existing standards communication applications) that would be delivered and protocols (Bower & Christensen, 1995; Christen- to users over an IP network. These applications would sen, 1997; Hamel, 2000, Tushman & Anderson, 1986, have been impossible, or prohibitively expensive, for Tushman & Nadler, 1986; Ahuja & Lampert, 2001). implementation in a traditional telecommunications While sustaining technologies serve the needs of most environment (e.g. TDM). Examples of these applica- customers, and are improved along the trajectory val- tions would include presence-awareness phone fea- ued by mainstream customers, disruptive technolo- tures, find-me-follow-me services integrated with gies take on a different trajectory as they diffuse in collaboration tools such as calendar/scheduling the marketplace. Typically, such technologies are programs, screen-pop provisioning beyond the call often cheaper and inferior in performance, yet they center environment, and similar applications. A num- involve features that may provide competitive advan- ber of these applications could also be custom-built to tage in the future. As Paap and Katz (2004) point out, deliver advanced location based services to users in a the disruption in the term ‘‘disruptive technologies’’ context-specific and time-sensitive fashion (Rao and is the effect some technology based innovations ap- Minakakis, 2002). Given these various application pear to have on markets affected by technology-based types and potential revenue streams derived from innovation. However, we argue that disruptive inno- them, there were a host of VoIP providers operating vation need not necessarily be inferior in quality. in the marketplace. As an illustrative example, we de- Although not as common as the bottom-up variety, scribe the key players in the US market at the time of top-down disruptive innovation aimed at high-end Skype’s launch (see Table 1). (and least price-sensitive) customers can actually out- perform existing products and will sell for a premium As can be seen from the exhibit, the competitive price rather than at a discount 1. In addition, techno- landscape was diversified, with firms approaching logical convergence is yet another example of how the same market through very different routes. Typ- disruptive innovations can occur, but in this case, it ical competitors included cable companies, tradi- is the combination of incremental innovations that be- tional telcos, a number of pure-play VoIP firms, comes disruptive (Hacklin et al., 2004). Before the no- and other challengers like IM (instant messaging) tion of technological convergence as a precursor to platforms and SIP (Session Initiation Protocol) disruption, technology fusion was described as being phones. Typically, the cable companies and telcos of- nonlinear, complimentary, cooperative, and market fered VoIP services as an additional service offering revolutionizing (Kodama, 1992). On the other hand, to their existing portfolio of audio, video, and content Markides (1998) and Hamel (2000) acknowledged programming. On the other side, the major drawback the existence of disruptive opportunities not only in considering VoIP service included reliability of the the process of the evolution of technologies, but also calls and vulnerability to security threats: in the evolution of business models. Using the above perspective, we find that both VoIP as well as the ‘‘Administrators may mistakenly assume that since digitized peer-to-peer mode of distribution represent disrup- voice travels in packets, they can simply plug VoIP components tive phenomena. In addition, they thrive in a net- into their already-secured networks and remain secure...2 worked environment where the growth patterns can be extremely rapid depending on initial acceptance – Security Report by the National Institute for Standards of such solutions. and Technology.
European Management Journal Vol. 24, Nos. 2–3, pp. 174–188, April–June 2006 175 FUSION OF DISRUPTIVE TECHNOLOGIES
Table 1 Major U.S. VoIP Service Providers
Company Location Details of VoIP Offering(s)
Cable companies Time Warner Cable Stamford, Conn. This subsidiary of Time Warner launched VoIP service in Maine in 2003 and is planning a nationwide rollout this year. It’s rumored to be an IPO candidate as a way for parent Time Warner to buy out 18% investor Comcast. Cox Communications Atlanta Cox offered VoIP in one cable market, Roanoke, Va. The company also provided digital phone service—including traditional circuit-switching technology—in other markets, where it pays phone companies to carry some calls. Cox customers paid between $9.99 and $15.89 a month for their first line. Cablevision Systems Bethpage, N.Y. Cablevision offered ‘‘Optimum Voice’’ VoIP service to high-speed Internet customers for unlimited calling in the U.S. and Canada at $34.95 a month. Its target market included its one million-plus cable-modem customers; the product launched in September 2003.
Telcos (Voice Carriers) AT&T Bedminster, N.J. Ma Bell announced business and residential VoIP services in major cities in 2004, with rollout in ‘‘select metropolitan markets’’ during the first quarter of 2005. VOIP was seen as a defensive move. Began offering the CallVantage plan in March, 2004. Verizon New York City The largest telco in the US planned to build the nation’s biggest ‘‘converged network,’’ which includes VoIP. It started with the Verizon VoiceWing broadband telephony service for $29.95/month.
Pure play VoIP Firms Net2Phone Newark A VoIP pioneer, it was focused on selling wholesale VOIP service to cable companies (although it generated its revenues by selling phone cards at convenience, for example). Vonage Edison, N.J. The biggest independent, Vonage offered national VoIP service. Monthly rates ranged from $15 to $35, and the service worked with any cable modem or DSL connection. Announced IPO plans in February 2006. 8 · 8 Santa Clara, Calif. A former chip company, 8 · 8 began offering its ‘‘Packet8’’ VoIP service nationwide in 2002. For $19.95, plus a $29.95 activation fee, customers get unlimited local and long-distance calling in the U.S. and Canada.
P2P Redefines Digital Distribution decentralized paradigm of networking with distributed usage of resources, such as bandwidth, memory, pro- In parallel to the trend of using internet telephony for cessing and computing power. No particular clients transmitting voice signals, another major develop- and servers were present as in the traditional form ment was enabling the rapid transfer of data packets of networking, but all nodes could act both as clients using peer-to-peer networking, a paradigmatic shift and servers at the same time. P2P systems could be over the client-server computing model. This peer- designed using various topologies, starting from cen- to-peer mechanism was formally defined as the tralized P2P systems like Napster, decentralized sys- action of mutually exchanging information and ser- tems like Gnutella, hybrid like Fast Track/KaZaA, vices directly between the producer and the con- 5 3 and structured P2P systems like Chord . Several sumer to achieve purposeful results . A more interesting applications based on P2P technology precise understanding for the technology was pro- 4 had been launched with varying degrees of success vided by the P2P Research Group, IETF/IRTF : (see Table 2).
‘‘Peer-to-Peer (P2P) is a way of structuring distributed applica- tions such that the individual nodes have symmetric roles. Rather than being divided into clients and servers each with distinct Integration of Disruptive Technologies: roles, in P2P applications a node may act as both a client and a server.’’ The Case of Skype
While P2P was not necessarily a technological leap in While the exercise of plotting the trajectories of VoIP the sense of a new manufacturing or functional inno- and P2P along an individual timeline is in itself an vation, it represented a fundamental paradigmatic interesting project, we believe that the more interest- and philosophical shift in the way data was distrib- ing question lies at the level of merger of the two uted and content accessed over a networked plat- technologies. Prior literature has not examined this form such as the Internet. P2P could be viewed as a angle of disruptive innovations due to a persistent
176 European Management Journal Vol. 24, Nos. 2–3, pp. 174–188, April–June 2006 FUSION OF DISRUPTIVE TECHNOLOGIES
Table 2 P2P Application Types and Examplesa
Application Type Examples
P2P file swapping (sharing) Napster, FreeNet, Gnutella, KaZaA, eDonkey, Morpheus, Grokster, EZPeer, Kuro P2P communication NetNews (NNTP), Instant Messaging (IM), Skype P2P lookup services and applications IRIS, Chord/CFS, Tapestry/OceanStore, Pastry/PAST, CAN, HP2P P2P overlay networking BGP, RON, PDF, Detour, LRR P2P multimedia streaming CoopNet, Zigzag, Narada, P2Cast, Streamlla Proxies and Content Squid, Akamai, DigitIsland Distribution Networks Overlay Testbed PlanetLab, NetBed/EmuLab Distributed data processing and Quarknet, SDSS, Neptune, SETI, Folding, Fightaids science content sharing P2P gaming Many multiplayer online games and several ongoing hybrid projects aSource: Chun-Hsin Wu, ‘‘Differentiated Admission for Peer-to-Peer Systems,’’ Academia Sinica – Taiwan, April 20, 2004; Ivyes Poppe, ‘‘The Peer 2 Peer Internet,’’ PowerPoint Presentation, May 13, 2004. Networld & Interop, Las Vegas, NV.
lack of qualified examples and the difficulty in mentioned literature related to the case-study based employing an appropriate framework of analysis. research. In order to examine this interesting question, we turn to the case of Skype, which represents a unique and novel merger of two disruptive technologies. Using a Skype: An Integration of VoIP and P2P case-based analysis of Skype’s technological under- Skype represents one of the first and most successful pinnings and its approach to the marketplace de- efforts at fusing together two distinctly different tech- rived from Rao and Angelov (2005), we describe nological breakthroughs. The founders of Skype had how Skype has successfully fused two distinct dis- introduced a P2P based VoIP software that would pro- ruptive technologies to deliver its unique brand of vide audio quality equivalent to conventional phone service offerings. In essence, we refer to case studies lines. This P2P technology could take various forms using Yin’s ‘‘technical’’ definition (Yin, 1994): that differed in their functionality and feature offer- ings, such as instant messaging and communication ‘‘A case study is an empirical inquiry that investigates a tools, file sharing utilities, and distributed comput- contemporary phenomenon within its real-life context; ing. In the case of Skype, all these features were inte- when the boundaries between phenomenon and context grated in an attempt to provide impeccable quality of are not clearly evident; and in which multiple sources of the voice service, along with various possibilities of evidence are used.’’ value-added packages at the lowest cost possible. While Kodama (1992) differentiates between a break- Yin (1994) argues that a ‘‘how’’ and ‘‘why’’ question through and a fusion approach to technology strategy, about a contemporary set of events is the proper re- Skype is clearly a representative of a fusion strategy search strategy when the investigator has little or no involving two breakthrough technologies. In addi- control over behavioral events. We believe that the tion, Skype’s fusion process follows Kodama’s three research question of our interest, analyzing how basic principles of: (1) demand articulation, (2) infor- and why disruptive technologies integrate, required mation collection and dissemination incorporating studying cases, and Skype is the choice we made. active receivers, and (3) reciprocal and substantial In addition, Eisenhardt (1989) identifies case-studies industry relations. According to the founders of as a highly appropriate research approach in investi- Skype, a true P2P system would have all network gating new topic areas or when a fresh perspective is nodes joined together to dynamically participate in needed. According to Eisenhardt, the resultant the- traffic routing, processing and bandwidth intensive ory (built from the case-study) is often novel, test- tasks that would have otherwise been handled by able, and empirically valid. Even though there are central servers. Skype thus successfully leveraged several methodological problems raised by the study all available resources in the network and had no of a single case (Lee, 1989), Lee describes the scien- infrastructure implementation and maintenance costs. tific method of case studies and proposes responses to the problems involved in the study of a single case (the case of Skype fits into Lee’s single case category). Technical Characteristics of Skype More specifically, Lee (1989) focuses on the issues of making controlled observations and deductions, In order to deliver its ‘‘state-of-the-art’’ IP-based tele- while allowing for replicability and generalizability. phony, Skype employed several techniques 6: In analyzing the integration of disruptive technolo- gies, our paper utilizes Skype as a case in point, (a) IP addresses – No end-user configuration of gate- and as such it can be evaluated using the previously ways and firewalls was required, thus avoiding
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one of the major issues with the existing VoIP Given this multiplicity of offerings and vendors, service providers. Skype tried to differentiate its offering immediately (b) A global and decentralized user directory – in in order to provide a more distinctive appeal to order to deliver high quality telephony with the users. It made available free downloadable software lowest possible cost, a third generation of P2P from its website, which enabled customers to sign technology (3G P2P), or Global Index (GI) was up and use the service almost immediately. The free necessary for development and represented yet nature of the initial service along with the superb another paradigm shift in the notion of scalable voice quality of the service made Skype stand out networks. The GI technology represented a from the rest of the IP telephony providers. In addi- multi-tiered network where all supernodes com- tion, interoperability with popular industry stan- municate in such a way that every node in the dards such as Microsoft’s Windows OS and Linux network has full knowledge of all available users OS ensured a wider adoption. In order to exploit and resources with minimal latency. the ever-increasing proliferation of Wi-Fi enabled de- (c) Intelligent routing – Skype used the most vices, Skype developed a Pocket PC version of its effective paths possible to intelligently route software, which essentially enabled calls to be placed encrypted calls. It kept multiple connection paths through the Skype account from a PDA. Skype’s co- open and dynamically chose the one that was founder, Niklas Zennstro¨m, provided an analogy to best suited at the time. This increased the call the introduction of the e-mail and the fax technology. quality throughput by reducing the latency. In the same way that e-mail did not replace the tradi- (d) Security – Skype employed special encryption tional fax service, Skype (or IP telephony in that con- technology (256 bit AES) to protect all calls and text) would not replace the traditional PSTN. This instant messages for unrivaled privacy. did not mean, however, that Skype was not going (e) Simple user-interface – Skype designed a very to try to approach the PSTN market. Through the simple and intuitive to use interface, requiring launch of the SkypeOut service (and later on the no special technical skill-set, to enable quick SkypeIn service), the company attempted to integrate adoption among various consumer segments. its VoIP offering with the old PSTN by extending its services and allowing connection to users not having Skype initially offered only PC-to-PC calling, com- Skype. Through a SkypeOut account, a customer bining the features of both IM and VoIP. The Skype- could call a traditional phone line (landline or mo- Out service, enabling connectivity to the POTS (Plain bile) at a competitively low (local) rate. In addition, Old Telephone Service), was added later on, as it by introducing the new SkypeIn service, Skype users happened with the SkypeIn service, enabling connec- were able to obtain up to 10 different telephone num- tivity from the POTS. The hardware requirements to bers, which made them accessible to the conventional use Skype were 400-MHz CPU, 128 MB of RAM and PSTN users. The obtained telephone numbers could 10 MB of hard drive space, microphone, sound card, be local numbers from different countries in the and speakers/headphones. A broadband Internet world. Capitalizing on the Internet as the global dis- connection was required to ensure superior voice tribution medium, Skype offered its product for dis- and service quality. tribution in fifteen languages allowing immediate penetration to over 165 countries. In addition, Skype partnered with Plantronics and Siemens AG to Skype: Service Offerings and Expansion launch branded headsets and accessories. These stra- tegic partnerships had a long-term objective of en- The VoIP industry could be segmented into three abling seamless customer transition from traditional main categories (Research and Markets, 2003). The services to their VoIP product. Plantronics was a pro- first category was represented by the technology ven headset manufacturer, particularly popular with providers, offering solutions for wholesale carriers the Internet customer base, while Siemens AG pro- and enterprises, supplying endpoints (IP-phones duced high quality telephone equipment and com- and soft phones), communication servers, applica- puter hardware. Targeting the market niche, tion servers, switches, routers, signaling points Skype’s position in the IP telephony was based on and gateways. This segment included companies innovation and personalization of the services. such as 3Com, Cisco, Lucent, Siemens, Nortel Net- works, and many others. The service providers like ‘‘Voice is just the beginning. Once you are in the IP environment Net2Phone, 8 · 8, Dialpad, Iscom, Vonage, Talking- you bring in video and data, it’s all about who can create the best Nets, Skype, ICQ and others, formed the second application ... it’s about interactive media.’’ 7 segment. The offerings of this segment included PC-to-PC, PC-to-Phone, hosted flat-free, calling – John Arnold, VoIP program leader for Frost & Sullivan cards and number portability services for both Inc. enterprises and consumer customers. Wholesale Carriers represented the third segment. The compa- The advertising and promotion strategy used by nies in this segment, such as iBasis, ITXC, Genuity Skype was simple and effective. It used strong and others, offered network services to service ‘‘word-of-mouse’’ networks to build up a critical providers. mass of users. It was the classic example of viral
178 European Management Journal Vol. 24, Nos. 2–3, pp. 174–188, April–June 2006 FUSION OF DISRUPTIVE TECHNOLOGIES promotion. Once a user had the software, he/she ‘‘Skype Store’’ offering desktop and wireless Plan- wanted friends and relatives to have it as well. Conse- tronics headsets that were compatible with the Skype quently, in just one week of availability, 60,000 people software. It also offered the Siemens Internet tele- had downloaded the free Skype software. The most phone, the Gigaset M34 USB PC Adapter as part of essential advantages of the P2P business model for their product portfolio. As part of Skype’s plans to be- Skype were the immense scalability options, easy come a platform for a new form of seamless commu- and cost effective marketing, and efficient retailing nication (free telephony), the company teamed with and distribution through partnerships. The fact that Motorola to develop products including headsets there was no special infrastructure to support the pro- and mobile devices for Skype users 10. Another possi- motion, customer recruiting process, and the distri- ble revenue model for Skype was leveraging the bution channels, gave Skype a strong competitive licensing of the Skype API to third-party developers advantage over the rest of the VoIP service providers. and carriers. As the popularity of Skype and VoIP In essence, the combination of viral marketing and grew, along with the improvements in reliability free PC-to-PC telephony promoted Skype into a cus- and security, licensing its software for handheld de- tomer-friendly company, and did a better job at gain- vices and phones could prove to be an extremely ing market popularity than expensive marketing and lucrative business for Skype 11. This model could sub- advertising campaigns, similar to those employed by stantially increase Skype’s presence in the telephony Vonage 8. In this context, Skype exhibited the some- market and promote the company into a key player what hidden characteristic of ‘‘disruptiveness’’. It on the market. One such example was a small Cam- changed the traditional marketing and business bridge based start-up, iSkoot, which uses Skype tech- model by letting the customer dictate the pace, and nology to make cell phone calls 12. As far as business even though it lacked the sophistication and depth customers were considered, Skype estimated that 30 of a well developed marketing campaign, it got the percent of its 40 million users (as of July, 2005) were message across better, cheaper, more effectively, corporate 13. In addition, most of them were small and on target. In addition, if the incumbents tried to and medium-sized businesses using Skype to save imitate this approach, they were doomed to fail be- money and add functionality to their conference calls. cause their business model was based on traditional This segment of the market could also be a substantial revenue generating processes, and their customers revenue generator since it was willing to pay premi- lacked the enthusiasm and incentives to virally pro- ums for value-added services while experiencing sig- mote their products. With Skype, they feel part of nificant savings by not paying for the telephony itself. the marketing team, and there are no hidden fees or It is interesting to notice that there was a growing cheap advertising tricks to lure them into using a agreement in identifying corporate VoIP users as technology they do not need or want. the key to complete VoIP prominence 14. In essence, analysts showed that return-on-investment (ROI) of Revenue Models VoIP involves multifaceted costs and savings 15, but improved productivity (as in the case of unified mes- The long-term goal of Skype was to provide fee- saging) and new services were probably as important based services on the top of its basic plan. The pre- as direct ROI 16. Therefore, as a long-term strategic mium services offered to specific customer groups goal, it was important for Skype to attract as many were designed as a major form of revenue for the corporate customers as possible and build an image company. Constantly adding value for their users, known both for innovation and reliability. Through Skype was planning to build high customer loyalty this variety of ways, Skype was attempting to create while building the critical mass needed to support a new-market winning strategy. the company’s growth. SkypePlus, the premium ser- vice offered by Skype, included Voicemail, mapping EBay and Skype: A Promise for Revolutionizing of DID (Direct-Inbound-Dialing), ad banner, and E-commerce other value added services. Considering the large customer base, Skype planned to include special While analysts were trying to determine Skype’s pos- third-party advertisements and e-commerce features sible long-term impact on the telecommunication to increase the revenue possibilities 9. industry 17, the company announced that it had agreed to be taken over by eBay Inc., the leading on- Two new services, SkypeOut and SkypeIn were line auction-house 18. This acquisition ignited a host developed to complete the service offering and add of different opinions about the real value of Skype value to the existing customers. It was very clear that as a company and about the nebulous business plans SkypeOut, a connection to the regular PSTN, could of eBay (concerning its new acquisition) in the fu- serve as a viable revenue generator 9. It provided ture 19. One of the reasons for these reactions was low-cost international calls and had attained popular- the price eBay agreed to pay for Skype. The online- ity among its users. Mr. Zennstrom, the co-founder of auction giant would acquire all of the outstanding Skype, revealed that about 5 percent of Skype mem- shares of the privately-held Skype for a total upfront bers used SkypeOut or SkypeIn 8. Another form of consideration of approximately $2.6 billion; $1.3 bil- revenue for Skype surfaced from its partnership with lion of which was in cash and the rest in eBay’s Plantronics and Siemens AG. Skype opened an online stock 20. In addition, there was a performance-based
European Management Journal Vol. 24, Nos. 2–3, pp. 174–188, April–June 2006 179 FUSION OF DISRUPTIVE TECHNOLOGIES earn-out as big as $1.5 billion, if Skype reached cer- ucts and services are delivered. The antecedents of tain performance goals by 2009. Even though there disruptive technologies are varied. Once they are were many experts who believed Skype could be a introduced in the marketplace, they can take multi- Google-sized opportunity 17 (one of them being ple paths to market dominance or their eventual de- Kevin Werbach, legal studies and business ethics mise. Prior research confirms how such innovations professor at Wharton Business School), most of them can often find new uses in untapped areas and also agreed that a takeover of the company had potential, recombine with other standards and protocols (Tush- but it would be definitely a surprise for them (con- man & Nadler, 1986; Ahuja & Lampert, 2001). In sidering the difference in culture between Skype addition, when they combine in such meaningful and major telecom and media companies). And ways, the net result can have a dramatic market im- while companies like Yahoo, Microsoft, Google, and pact, as we see in the case of Skype. News Corp. were rumored to have a vested interest in buying Skype 21; eBay was the company that actu- ally did the acquisition. Why are VoIP and P2P Disruptive?
Even though eBay announced that it was not going to VoIP and P2P are individually characterized by pro- transform itself into a phone company 22, it did cesses, products, services or business models that of- emphasize the importance of communications as fer lower performance along traditional trajectories. being at the heart of e-commerce and community, In the case of VoIP, the underlying innovation is thus considering Skype as the road towards creating the use of the Internet to transfer voice data. In the extraordinarily powerful environment for business case of P2P, it is the use of a new form of distribution on the Net 23. In some way, the partnership between to speed up such data transfers. Following the norms eBay and Skype could turn out to be another type of of evolution of disruptive technologies, both VoIP potentially disruptive opportunity. Skype could now and P2P were individually under-valued by tradi- count on eBay to support its brand and image (along tional lead customers in their respective markets with its financial needs). This could prove extremely and were generating lower gross margins, in addi- favorable for Skype, especially in times when the VoIP tion to being perceived as ‘‘low-end’’ by industry community believed in corporate customers to be the incumbents (Thomond et al., 2004). key towards global telecommunications convergence, and whilst Skype was being attacked for its reliability, Traditional phone companies did not perceive VoIP quality and security promises 24. As a business oppor- to be a serious challenge to their existing monopolies. tunity, Skype could increase the velocity of trade on And while VoIP was becoming more attractive to eBay, add a voice bargaining option to its large cus- residential customers, the real opportunity lay in tomers, and introducing ‘‘pay-per-call’’ advertising the corporate market. The Internet was at the heart with the potential of generating significant revenue. of VoIP and equipment vendors played a major role As far as Skype’s future was considered, PayPal (an in supporting the technical infrastructure required eBay owned company) could provide simple, secure, for reliable IP-telephony. Since large corporations and reliable billing and accounting, exactly what were ‘‘big spenders’’ on IT equipment, their VoIP- Skype needed for its corporate customers 23. In addi- oriented strategy directly influenced the growth of tion, eBay’s strategy left Skype highly independent VoIP infrastructure 25 provisioning. Acknowledging as a brand and as a business, something large telecom the changes in the telephony sector, many telecom- and media companies would have rarely done 18. munication incumbents were entering the high-end (business) VoIP market 26, along with software giants The acquisition of Skype has definitely shed a differ- such as Microsoft 27 (primarily interested in corpo- ent light on the previously acclaimed disruptive rate videoconferencing) and Google (with Google character of the company. However, the fact that Talk). On a residential level, while Microsoft did Skype was bought by eBay, not Microsoft or News not plan to offer conventional phone service over Corp., left room for additional opportunities for tech- the Internet 28 (its acquisition of Teleo Inc., a VoIP nology and business fusion, and thus for a host of technology company, was aimed at improving the new ‘‘potentially’’ disruptive technological and busi- voice capabilities of Microsoft’s IM service), Yahoo ness models. If today we are interested in the impact announced that it would offer new services that of the fusion between VoIP and P2P, future research blend its IP technology with the PSTN, providing could delineate the possibilities of combining P2P ‘‘intelligent presence’’ for its customers accompanied and online auctions or advertising. with voice email and search 26.
Businesses engaged in various forms of distribution Disruptive Innovation: Antecedents (including music, movies, etc.) had only recently begun to perceive the threat posed by P2P distribu- and Consequences tion mechanisms. The music industry in particular, had been aggressively going after companies like Disruptive technologies like VoIP and P2P can often Kazaa and BitTorrent, which enabled such viral dis- represent a new value proposition in the way prod- tribution. In addition, the revolutionary P2P technol-
180 European Management Journal Vol. 24, Nos. 2–3, pp. 174–188, April–June 2006 FUSION OF DISRUPTIVE TECHNOLOGIES ogy had expressed its technical disruptiveness by the Internet) are delighted with the voice quality and proving itself to be unbreakable and technically service options and are eager adopters. In addition, unstoppable (Montemagno, 2005). On another level, Skype could be considered a radical technology. P2P seemed to have awakened people’s need for ‘‘so- Using Dahlin and Behren’s (2005) definition of cial sharing’’, and started to challenge the conven- ‘‘technological radicalness’’, Skype fulfilled the three tional marketing and business models. necessary criteria of novelty, uniqueness, and adopt- ability. This definition focused more on the techno- What made both VoIP and P2P interesting at the logical impact rather than on market impact. individual level was that they each introduced new performance criteria in certain niche market settings. It was also possible that the VoIP-P2P combination VoIP represented a cheap and alternate method of could emerge as the next platform for a new set of doing something very traditional – placing a phone continuous or incremental innovations in the future call. P2P, in turn, represented a faster and more con- (Clark & Henderson, 1990). The eBay acquisition of venient method of accessing files and content over Skype could be an introduction into a future lateral the Internet. Slowly but surely, each of these two technological and business convergence (Hacklin technologies were going mainstream and reaching a et al., 2004), characterized when mature (known) wider and perhaps a critical mass of customers. As technologies or businesses (eBay) integrated with pointed out by previous research, a period of exploi- technologies (new technologies) or business in their tation and upstream migration upstream toward early/growth phase (Skype). When such conver- higher-end customers could eventually redefine the gence occurred, the potential for disruption of the paradigms and value propositions on which existing traditional technological and business models (re- industries were based (Thomond et al., 2004, Chris- lated to the mature technology) could be immense. tensen 1997, Christensen and Overdorf 2000). Skype Using the same model of technological convergence represented a successful fusion of two disruptive (Hacklin et al., 2004), Skype’s fusion of P2P and VoIP technologies. What made this integrated or joint level can be labeled as potential convergence. However, offering significant was that it represented a discon- traditional customers of voice services (both corpo- tinuous innovation that could rattle the existing rate and consumer) had not yet fully embraced this industry structure and create completely new forms new technology and associated services. This was of value delivery. There was already some evidence due to a number of factors including low awareness, that services like SkypeOut and SkpyeIn were a hesitation in using an online platform for voice call- move in that direction. We describe this phenome- ing, and a desire to see a more stable and reliable non in the section below. service quality both online and phone-to-phone. Therefore, it remained to be seen if Skype would dominate the voice market in the conventional sense, and disrupt it irrevocably. In order to do so, it When Disruptive Technologies Integrate: needed the market coverage and traction that were Evidence from the Skype Case currently the perquisite of the large voice carriers. It was possible that relational arrangements between Why is Skype a Discontinuous Innovation? Skype and such players might ensure a wider dis- semination of P2P based VoIP. As pointed out by Skype represented the fusion of two disruptive tech- Lynn, et al. (1996), the case of Skype confirmed that nological paradigms (i.e. VoIP and P2P) that had the most consistent feature of a discontinuous tech- resulted in a discontinuous innovation offering. nology was the high degree of uncertainty about its According to Kodama (1992), technological fusion future and the potential for interaction between var- had the characteristics of nonlinearity, complemen- ious types of uncertainties (like market, technology, tarity, and cooperativeness. This is how Skype’s tech- timing, managerial control, etc.). Further, the future nological model integrated the scalability of P2P with actions of competitors and the ongoing trends in the functionality and efficiency of VoIP. At the same industry consolidation could also alter the impact time, Skype also fused the underlying P2P philoso- process. For a discontinuous innovation like Skype phy of ‘‘social sharing’’ with the cost-effectiveness to be truly disruptive, successful exploitation of its of VoIP in order to shape its business and marketing potential was vital, and the result could be a signifi- model. Typically, discontinuous innovations offered cant transformation of the mainstream market and its major improvements in performance in the direction value proposition (Thomond and Lettice, 2002). that lead-consumers desired, yet were challenged by Using Christensen’s (1997) understanding of the implementation and adoption issues (Christensen disruptive technology phenomenon, Skype can be 1997, DeTienne and Koberg, 2002, Thomond et al., viewed both as a bottom-up and top-down disrup- 2004). In the case of Skype, the end result was discon- tion 29. Its low cost (no infrastructure cost), radical tinuous because a) Skype offered a revolutionary leap nature, and temporarily lower quality than the in performance over conventional VoIP, and a leap in traditional PSTN (in this case we consider Skype’s functionality over traditional voice calling, and b) requirement of having a PC and a broadband there was indication that lead-users of Skype (who connection as an inferiority to PSTN, for which are typically more comfortable with making calls over the same non-requirements represent performance
European Management Journal Vol. 24, Nos. 2–3, pp. 174–188, April–June 2006 181 FUSION OF DISRUPTIVE TECHNOLOGIES oversupply) give Skype a bottom-up disruptive pure-play VoIP providers like Vonage were offering appearance, but its new functionality, value-added more enhancements to their services by integrating possibilities, and highly sophisticated users make VoIP calling over wireless broadband networks. this company a top-down disruptive technology. Vonage had recently announced the launch of Wi- Fi phone that could make calls over the Internet at homes or at public Wi-Fi hot spots. Vonage subscrib- Impact on the Marketplace ers would thus have access to a limited-use cell phone with no extra costs (Davidson, 2004). Skype’s market potential was considered to be vast, as were the number of determined competitors. Depend- Even though Skype declared itself as a second phone ing on which segment of the market it sought to enter, alternative to the traditional PSTN it was more than there were a number of alternate strategies that could mere competition for the traditional telephony be pursued. By entering the IP telephony market, providers. Skype had garnered the attention of other VoIP pro- viders, such as Vonage, Net2Phone, 8x8, DialPad, ‘‘In the big picture this is very threatening (to traditional telecom FreeWorld Dialup and others, and traditional voice providers) because it works. They’ve demonstrated that they can carriers such as AT&T, Verizon, Qwest etc. Despite make end-to-end phone calls and cut the phone companies out of the equation.’’ 9 the clear service differentiation of Skype, the fight on both market fronts was inevitable. These two – Jon Arnold, VoIP program leader for Frost & Sullivan Inc. groups represented the key market segments formed by the alternative VoIP service providers, and the tra- The big telcos, forming the second segment of the ditional voice carriers and MSOs. The battle with the competition were skeptical of Skype’s potential: alternative VoIP providers was considered an easy one by the founders of Skype. In this segment, compa- 30 ‘‘What Skype is doing is like a toy. They will realize they can’t nies like Vonage (41 percent US market share in scale it, they don’t have a brand like the AT&T brand, and they 2004) that had well-established pricing models suf- don’t have the local footprint, which we have. It’s going to be fered from very high infrastructure costs, thus clearly very hard to compete with someone like AT&T.’’ 32 giving Skype an upper hand in the market. To add a new user, Vonage had to spend almost $400 (com- – Hossein Eslambolchi, AT&T’s CTO and president of pared to no cost for Skype). In addition, the pricing AT&T labs. model, as opposed to the free basic service, was a major disadvantage in obtaining a critical mass of users. Despite its dismissal of Skype, AT&T had entered the On the other hand, Vonage used telephone adapters IP telephony battle. So had other carriers like Veri- and provided regular PSTN connection, while Skype zon, Qwest, Cox, Cablevision, and Time Warner was based on the PC platform and its users were not Cable. The competition was intensifying and a low- available outside Skype’s network. With the introduc- cost service was a critical tool for attaining competi- tion of SkypeIn and SkypeOut services, Skype en- tive advantage. In addition, the traditional telephony abled full connectivity of its users to the PSTN. carriers were still considering the PSTN as a major business opportunity (their main form of revenue), The second representative of the VoIP segment, viz. thus relentlessly trying to ‘‘keep it alive’’ as long as the popular instant messaging (IM) providers possible. (Yahoo, AOL, ICQ, MSN, Netscape and others), had an immense shortcoming in the poor quality of In terms of revenues, despite its sharp growth, Skype the voice service. Their infrastructure and technology had experienced only a modest payoff (according to were not designed to support high-quality voice some analysts 33). The VoIP company earned $7 mil- communications since telephony was their second- lion in revenues last year, and it is on track to gener- ary service. As with alternative VoIP providers using ate $60 million this year and $200 million in 2006. On telephony as a primary service, the IM providers’ the other side, a report by Evalueserve 34 predicted at centralized infrastructure represented additional least 22-26 percent reduction in overall profitability drawback considering their customer expansion. An- and revenues by 2008 for incumbent telecom opera- other new entrant with a potentially discontinuous tors offering fixed services, and a 5 percent reduction trajectory was the SIPphone. Based on the popular for operators offering mobile services. In the mean- Session Initiation Protocol (SIP), SIPphone was a time, Skype was supposed to reach between 140– stand-alone appliance easy to use and configure. It 245 million users worldwide. In addition, the report represented direct competition to Skype. A major stated that European incumbent telecom operators disadvantage was the limited interoperability with were at greater risk than their US counterparts, and non-SIP devices and the traditional PSTN. In the cor- that VoIP providers could lose up to 90 percent of porate domain, Avaya was the global leader in com- their revenues unless they change and adjust their munication systems, applications and services. business model accordingly. These forecasts can be Avaya’s market share was substantial and based on interpreted as a result of the value-creation potential the reliability, security, customer relationship, and lying in the convergence process (Nystrom & Hack- the effectiveness of their offering 31. In addition, lin, 2005) of the two disruptive technologies
182 European Management Journal Vol. 24, Nos. 2–3, pp. 174–188, April–June 2006 FUSION OF DISRUPTIVE TECHNOLOGIES integrated in Skype’s offering (P2P and VoIP). Build- points to a strategy of targeting ‘‘non-consumers’’ in ing a disruptive technology resulted in a disruptive a particular industry – i.e. those who have historically business model. If we consider value as what cus- lacked the skill or money to use their products (Gil- tomers are willing to pay, what happens if they don’t bert, 2003; Gilbert & Bower, 2002). Through incre- have to pay anything? Skype is as close to that value mental improvements from this starting position, promise as no telecom incumbent has been before. In the pool of non-consumers can be expanded to in- addition, by using viral marketing, Skype delivers clude consumers of incumbents and eventually exist- yet another value promise to its customers, thus rais- ing markets could be entered using this strategy. In ing the general expectations in the global communi- the case of Skype, the ‘‘non-consumers’’ turn out to cations industry. The technical capabilities of the be very demanding and sophisticated, and actually integrated P2P and VoIP offering are well above represent a unique and perhaps premium niche seg- what the traditional telecom operators can provide, ment of early adopters. They also perform another and the richness of the value added features sets a valuable function in this context – through their new standard in the industry. Thus, a total reinven- ‘‘word-of-mouth’’ recommendation; they increase tion of the telecommunications business becomes the pool of customers for Skype’s services. In this inevitable. On top of it, if we take a company per- context, we believe that the traditional notion of spective and a network approach in defining value, ‘‘non-consumers’’ being naı¨ve, unsophisticated, or re- as something created between actors in exchange source-poor needs to be revised. An important way relationships (Nystrom & Hacklin, 2005), eBay’s for such innovations to gain traction is by attracting acquisition of Skype promises even more staggering an early set of sophisticated customers, who in value creation possibilities. turn influence others to consider the newcomers products and services. Combining this feature with the networked power of the Internet means that the entire process can be significantly accelerated, both Research Propositions through firm-centric managerial intervention, and customer-centric adoption and co-creation (Prahalad Based on our analysis of some of the key features of & Ramaswamy 2003, Iansiti & MacCormack 1996). Skype’s business model and its marketplace position, we propose a set of research propositions for further Based on the above discussion, we offer the follow- academic and managerial considerations. These ing research proposition: propositions demonstrate the importance of agility and flexibility in meeting challenges posed by recom- P1: Recombinant (disruptive) innovations can result in a binant disruptive innovations. Depending on the type discontinuous innovation of marketplace player (large or small, new or incum- bent), the strategic and operational implications can Given the plurality of visions and strategic goals as range from nonexistent to the dramatic. We organize described in the previous sections, we envision mul- our propositions under four key headings. tiple paths to achieving greater integration of multi- ple disruptive technologies like VoIP and P2P in In a previous section, we discussed how Skype repre- this market landscape. Each of these paths also repre- sented a successful integration of two distinctly dif- sents strategic postures adopted by players operating ferent disruptive innovations. The key here is to in each of the sub-domains. We categorize these realize that this fusion can create an entire new dy- approaches based on two axes: namic and result in a technological and/or market- place discontinuity. As Internet-based technologies (a) Degree of convergence: This axis represents the gain more traction and the capacity to integrate di- degree to which the service package consists of verse innovations based on networked infra- a number of converging elements. In our analy- structures gain popularity, we can expect to sis, this would typically represent a portfolio of encounter more examples of such fusion. One related service offerings including voice calling, e-mail, reason for such developments is the fact that internet instant messaging, video communication, file protocol facilitates modular and plug-and-play ap- sharing, etc. proaches to building new service capabilities (such (b) Degree of discontinuity: On this axis we classify as IPTV 35). Entrepreneurs will find more opportuni- the different approaches based on the degree to ties in integrating technologies as diverse as biomet- which the inherent innovation driving the busi- rics, nanotechnology, and information technology, to ness models are discontinuous, i.e. the extent name a few. to which they shift the learning curve due to more attractive performance metrics. Past research recognizes two distinct ways by which a disruptive technology could impact an industry. One We present a summation of some of these paths in potential method is to exploit performance oversup- Exhibit 1. plies and attack lead players through a low-end dis- ruption using simplicity and novelty (Christensen, As can be seen in the exhibit, one immediate way of 1997; Charitou & Markides, 2003). Another thesis countering the effect of an innovation like Skype is
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cable and DSL providers who offer a wider range of bundled services. Since they typically possess a critical media foothold into the homes and offices of end-users, they enjoy a major advantage in either pushing or rejecting new and potentially disruptive technologies (a classic ‘‘entrenched’’ position). This gives them some slack before they figure out whether to operate in relatively new and risky markets. Some of these cable and DSL operators are already offering bundled VoIP services as they seek to price the tradi- tional voice carriers out of the market, and also in- crease customer switching costs. In addition, they may seek to embrace a medium like Skype in the fu- ture either through acquisition or licensing, and thus offer more choice to their customer base. By adopting a skills-acquisition approach that employs recombi- nation of their current capabilities (Kogut and Zan- der, 1992), these firms can approach new markets and opportunities as those represented by an integra- tion of VoIP and P2P. This is consistent with a port- folio-based strategy of innovation where firms gradually move into different markets by extending existing current technical trajectories (Abernathy Exhibit 1 Paths towards Integration of Multiple and Clark, 1985; Venkatraman and Lee, 2004). Disruptive Technologies
The fourth path that can be also taken by some industry players is to engage in direct head-to-head to rapidly embrace the new technology or set of tech- competition with Skype. In order to do this, they nologies that enables a drastic improvement in per- have to possess an equally novel or comparable formance metrics and delivers a high-quality and underlying technology and distribution mechanism, cost-effective solution. This view is most applicable and be willing to aggressively go after new custom- to the industry incumbents, i.e. the traditional voice ers. The pure-play VoIP players and SIP Phone pro- carriers. However, the voice carriers do not perceive viders, VoIP-WiFi combination services providers, an immediate threat due to certain other advantages and instant messaging platforms are key representa- they currently enjoy, like a large installed subscriber tives of this strategic group. They face challenges base, a more grounded and stable technology plat- similar to those faced by Skype, including the chal- form, and certain size and tenure-related advantages. lenge of rapidly growing the customer base (by add- Given the turbulent technological environment ing both new and current customers of incumbents), they find themselves in, these incumbents need to uncertain returns on technological investment in the be extremely flexible and responsive insofar as incor- short run, and lack of clarity in market definition and porating new technologies and product introductions competitive potential. Their high-risk, high-return (Iansiti, 1995). However, it is likely that dominant profiles mean that there could be big winners and firms are likely to adopt more incremental innova- significant failures in the group. tions rather than take a radical approach (Utterback, 1994). There are thus multiple paths to migrate towards a The second path consists in gradually adding new high-value position even in this crowded market- service options through a steady migration upstream place. Increasing levels of convergence and disconti- towards more technological domains and opportu- nuity can be proving grounds for a new breed of nity areas. Some carriers are beginning to see the players who offer a range of products and services importance of VoIP, cable, DSL and potentially P2P for communications, connectivity, commerce and powered solutions and are making slow but steady entertainment. Following the previous rationale, the strides to shore up their learning and capacity in second research proposition is as follows: these areas by taking the second path, which we label this ‘gradual upstream innovation’ in the Exhibit. P2: Alternative paths exist in successful integration of There are examples in the literature of such organiza- disruptive technologies tions responding successfully to discontinuous inno- vations despite various structural and organizational Given Skype’s differentiated positioning in the VoIP limitations (Macher and Richman, 2004). and convergent communications space, traditional voice carriers face a critical decision on how to chal- The third option, and perhaps the safest position to lenge or incorporate the discontinuous innovation be in the current scenario, is the space occupied by represented by Skype. Several firms in the past have
184 European Management Journal Vol. 24, Nos. 2–3, pp. 174–188, April–June 2006 FUSION OF DISRUPTIVE TECHNOLOGIES vanished because of an unwillingness to anticipate initial software, and the rapid buildup of a viable and/or embrace ‘‘disruptive innovations’’. If tradi- and global customer base. Even though Skype had tional voice carriers believe that Skype represented declared itself as an alternative to the traditional a new and more effective paradigm for delivering PSTN, it was more than mere competition for the tra- services that are core to their business proposition, ditional telephony providers. they will need to rethink their technology and busi- ness strategies accordingly. Skype represented a un- ‘‘In the big picture this is very threatening (to traditional telecom ique case where a combination of two disruptive providers) because it works. They’ve demonstrated that they can make end-to-end phone calls and cut the phone companies out of technologies had created a strong discontinuous 9 innovation space. As previous research has uncov- the equation.’’ ered, the introduction of a technological disconti- nuity often gives rise to an era of ferment and – Jon Arnold, VoIP program leader for Frost & Sullivan Inc. uncertainty as new and incumbent firms try to intro- In addition to the successful launch of their initial duce new products and processes that aim to capture product, the founders of Skype had also demon- profits from the emerging technology paradigm (Ma- strated agility and quick maneuvering. A spate of cher and Richman 2004). Flexibility, responsiveness new product features had been launched, with the and dynamism would be critical to entrenched objective of improving customer experience and also incumbent’s success in such turbulent transitions reducing dropout rates. In the long run, this would (Iansiti 1995, Thomke and Reinertsen, 1998; Tushman provide the company with a more sustainable com- and O’Reilly, 1996). Also, as described in the sub-sec- petitive advantage. The fact that the peer-to-peer tion above, certain types of diversified incumbents and Internet-based nature of the service allowed for might enjoy more of a leeway in responding to a rapid product and service development and rollout potentially discontinuous innovation. was not lost on the management team at Skype. They Hacklin et al. (2004) argue that in times of drastic had clearly identified their core capabilities and were changes in the market environment (when disruptive willing to compete and excel based on them (Stalk, technologies appear) it is crucial for industry incum- Evans and Shulman, 1992). bents to focus on a resource-based view of the firm activity. On the other side, it is very uncertain for ‘‘By having telephony as a Net application, we can develop new features faster... it takes a long time for traditional telephone the ‘‘disruptor’’ of the marketplace (in this case companies to develop new switches.’’ 9 Skype) whether it will continue its disruptive path, or end up as a trophy in some large incumbent’s – Niklas Zennstro¨m. showcase. What is the likelihood of integrating Skype in an incrementally oriented business com- Even though researchers have suggested numerous pany? Nystrom and Hacklin (2005) confirm the the- reasons why incumbents fall victim to disruptive ory that technological convergence could represent innovations (Christensen, 1997; Hamel and Prahalad, a special case of disruptive innovation, and eBay’s re- 1990; Anderson and Tushman, 1991) and explana- cent acquisition of Skype may turnout to be a perfect tions of the managerial influence in that process case in point. In addition, it is tempting to examine if (White, 2004), it is our opinion that managerial vision eBay and Skype can create a new business dynamic and intervention is an absolute requirement for a following the method of lateral convergence (Hacklin technology, along with its business model, to become et al., 2004), which occurs when a known, incremen- disruptive. Similar to our previous deliberations, we tally oriented company converges with a new, dis- consider Skype as a well-suited example of this ratio- ruptive market entrant. This takes us to the third nale. In addition, we suggest the following research research proposition: proposal:
P3: Disruptive innovation can grow to become a sustain- P4: For a discontinuous innovation to become disruptive able and dominant innovation model after an established it has to be spurred by managerial vision and interven- and incrementally oriented company acquires a new and tion accompanied by engineering creativity and excel- disruptive firm lence
Finally, one cannot discount the role of managerial intervention in shepherding a potentially discontinu- ous innovation to marketplace success. It is here that Skype enjoyed a strong competitive position. Har- nessing their prior experience, exposure and indus- Conclusions try connections with the launch of Kazaa, the founders of Skype were determined to make their It is well established in the literature that innovation new company a success. They adopted a number of in the form of new combinations of products, mar- strategies that play to their position of strength but kets, supply sources, and organizations can some- at a low incremental cost. These included a low-cost times lead to the destruction of incumbent firms, viral marketing strategy, the free distribution of industries or technologies (Schumpeter 1943). In
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References Lynn, G.S., Morone, J.G. and Paulson, S.A. (1996) Market- ing and discontinuous innovation: The probe and Abernathy, W. and Clark, K. (1985) Innovation: Mapping learn process. Sloan Management Review 38–3, 8–37. the winds of creative destruction. Research Policy 14, Macher, J.T. and Richman, B.D. (2004) Organizational 3–22. Responses to Discontinuous Innovation: A Case Study Ahuja, G. and Lampert, C. (2001) Entrepreneurship in the Approach. International Journal of Innovation Manage- large corporation: A longitudinal study of how estab- ment 8–1. lished firms create breakthrough inventions. Strategic Markides, C. (1998) Strategic Innovation in Established Management Journal 22, 521–543. Companies. MIT Sloan Management Review, Vol. 39, Amit, R. and Zott, C. (2001) Value creation in e-business. No. 3 (Spring), 31–42. Strategic Management Journal 22, 521–543. Montemagno, M. (2005) . URL:
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BHARAT RAO, Depart- ODED NOV, Depart- ment of Management, ment of Management, Polytechnic University, 5 Polytechnic University, 5 Metrotech Center, Brook- Metrotech Center, Brook- lyn NY 11201, USA. lyn NY 11201, USA. E-mail: braol123@gmail. com Oded Nov is Assistant Professor of Management Bharat Rao is Associate at Polytechnic University, Professor of Management New York. His research at Polytechnic University, focuses on knowledge New York. His research management, managing focuses on the impact of technologies and organi- information and communications technologies, wireless zational behaviour. and broadband innovation, the diffusion of emerging technologies, and global innovation strategy.
BOJAN ANGELOV, Department of Manage- ment, Polytechnic Uni- versity, 5 Metrotech Center, Brooklyn NY 11201, USA.
Bojan Angelov is a Doc- toral Candidate in tech- nology management at Polytechnic University, New York. His research centers on disruptive technologies and global innovation strategy.
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